Signature Bank, thrives in a too-big-to-fail market by giving veteran bankers breathing room and a chance to stick around

Joe DePaolo hates customers—not the people, of course, but the term “customer.”    

 

“I can’t stand it when someone refers to a ‘customer’.” says the president and CEO of New York City’s Signature Bank. “A customer is somebody who goes to the grocery store. We have clients—someone you have a deep relationship with. You never hear a lawyer refer to a ‘customer’.” He points out that the private, middle-market businesses on which the bank focuses have more of a relationship on a daily basis with their banker than with their lawyer, accountant, or doctor.

 

Signature Bank is a small New York City player with big ideas about what a bank should be, and a compensation approach that makes them work.

Calling a $6.9 billion-assets bank “small” is relative. Compared to JPMorgan Chase, Citibank, Bank of America, Capital One, HSBC, and other megabanks stalking the canyons of Manhattan and its suburbs, Signature Bank is a blip. The only reason it might get on their radar is when it lifts out a team of veteran bankers—which it has been doing regularly for seven and a half years.

Hiring people from the big guys is a standard operating procedure for small and midsize banks, but in Signature’s case, the practice is combined with an unusual operating philosophy that so far has propelled its growth from $50 million in assets to nearly $7 billion since 2001, without an acquisition. It also allowed the bank to go public three years after opening, and to take out its initial capital partner, Bank Hapoalim, in four years. This September, the bank raised $140 million in an oversubscribed secondary offering, bringing its Tier 1 capital to 9.64%. (The bank applied for $120 million under the “TARP” Capital Purchase Program, which, if approved, would bring its Tier 1 capital to a pro forma 11.49%.)

 

Maintaining high levels of capital, says DePaolo, is the only way a $6.9 billion bank can compete for deposits against the too-big-to-fail banks, all of which it competes against.

Signature focuses on privately owned small businesses. It provides every client a single point of contact at one of its dozens of private client groups. It concentrates more on deposits than loans, and it puts everyone on incentive compensation balanced to pay for sustainable business and client support. The bank’s growth comes from the business brought in by the teams of bankers it hires away from the big banks, and from the new business that these teams develop. It does not advertise.

The bank is the brainchild of DePaolo, a 49-year-old former CPA, and two colleagues, Scott Shay, chairman, and John Tamberlane, vice-chairman. DePaolo and Tamberlane formerly worked for the old Republic Bank of New York, where parts of the strategy described above were used. But when Republic was acquired by HSBC Bank, the two joined with Shay, a client, and set out on their own.

Attracting the “fiercely loyal”
There have a been a raft of mergers in the New York market in the last decade in which middle market banks were swallowed by larger institutions. What typically happens, says DePaolo, is that the big banks take private business clients and homogenizes them, often moving them into the retail group.

“Now, all of a sudden, if you have a question,” says DePaolo, referring to clients, “you can’t call the banker that you’ve worked with for years, you have to call an 800 number.”

Further, big banks have division execs through which everything now has to funnel. “They have to show their worth,” says DePaolo, “so they have weekly meetings and try to tell people who’ve been in the business for 40 years how to develop business.”

These veterans are the people Signature seeks out—usually by word-of-mouth.

“The typical person we hire has been in banking a long time,” says DePaolo. “They are fiercely loyal to their clients and to the institution they work for—except that the institution is gone. They don’t want to leave their banks, but feel they have no choice because they can no longer deliver to their clients.

“We approach them and talk about our structure,” DePaolo continues. “I describe it as a professional services firm with administrative and operational support—like a law firm or accounting firm.”

Signature executives usually seek business development officers, because they are the ones who can bring clients with them. They also typically recruit two to four support people who work with that officer. This results in a private client banking group, or team. Most team members have 25-30 years banking experience, and each team has its own bonus pool.

There is no middle management standing between the group directors (team leaders) and DePaolo. They all can call him, and do, although his primary role is to support business development, meeting with clients and talking about the bank. Other senior officers handle issues relating to operations, administration, pricing, or credit.

Everything works through the team—deposits, letters of credit, cash management, drawing down a line of credit, etc.

We build the bank for deposits
There are no lenders on the teams. “We have teams of bankers not lenders,” says DePaolo. The teams develop business and sponsor loan requests, but the underwriting is done by senior lenders who report to the chief credit officer and are not part of the team. The reason for that lies in the compensation plan the bank uses. “You must separate the compensation for developing business from the credit approval process,” says DePaolo.

Another reason for the emphasis on “banker” versus “lender” is that DePaolo regards deposits as more important than loans.

“Everyone thinks of banking as lending,” he continues. “I think of banking as bringing in deposits. If I have to give you money, it’s easy to bring you in as a client. If I have to get your money, it’s harder. Fundamentally our belief is you build the bank for the deposits, which means you have high capital levels and a conservative balance sheet.

“I’m not saying we don’t do loans,” says DePaolo, “we’ve been growing them as percentage of assets [from 17% several years ago to the mid 40s now], but we do not want to do loan to anyone unless they’re a depositor as well.”

That’s why the bank’s incentive compensation plan gives a lot more credit for deposits than for a loan.

Paying for “finders” and “minders”
Signature Bank’s incentive compensation plan is based on a similar plan used at the old Republic Bank. One of the plan’s goals is to encourage the teams to stay together. In large institutions, says DePaolo, the way you increase your compensation is to do well in one area and then move to another. “Is that good for the client?” he asks. “I don’t think so. What we’ve done is create an environment where you can increase your compensation without movement.”

Each team brings a book of business to the bank, and then grows it. “It’s their business,” says DePaolo, so a client’s revenue stays with the team as long as it still has that client. The revenues and expenses are allocated to a team P&L, on which a bonus is paid. There is no cap.

Many compensation models separate “finder” from “minder.” says DePaolo. As a result, with no stake for the minders in keeping the client on board, business comes in and then leaves. “Here,” he says, “the team is responsible for both, so that if a client leaves, the team’s bonus pool is affected.”

The group directors—the “rainmakers”—do get the biggest share of the pool, says DePaolo, but “if you’re a support person on a successful team, you do very well. This year we have the chance for our first bonus pool [for one team] to exceed $1 million.”

People outside the team also get incentive compensation, but whereas the team bonuses are objective—based on revenues minus expenses and losses—bonuses for senior lenders, cash management officers, and operational staff are subjective. They are based on senior management’s assessment of how well they respond to clients and teams.

 

If a loan goes bad, the bonus pool of the team that serves that client takes a hit. But also, the senior lender who approved the credit would have that taken into account for his or her bonus.

Create your own culture
It’s often been observed regarding mergers that cultural issues can create more problems than operational issues. At Signature, each new team brought in is, in effect, a small acquisition. Yet culture is not something that concerns DePaolo.

“We have our policies and procedures,  of course, but I try not to create a culture where we say, ‘We are Signature, and, by the way, here’s the company pin.’ Instead, we say, ‘Be your own person.’ I have 70-plus group directors—the most diverse set of personalities you’re ever going to meet. But they all have the same focus—business development.”

Ultimately, says DePaolo, “there are so many things here that are unlike where they came from, that they kind of fit in over time.” BJ

 

The electronic version of this article available at: http://lb.ec2.nxtbook.com/nxtbooks/sb/ababj1208/index.php?startid=26

 

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